It’s been a volatile two months for the Nasdaq-100 Index (QQQ), but after a sharp double-digit decline, the index has regained its footing and is knocking on the door of new all-time highs. Unfortunately, while several growth names have pulled back considerably from their highs, there is little value out there, with valuations among growth stocks and the indexes sitting at or near record levels. However, these are two names that are out of favor that have been consolidating for several months, and both are now trading at very reasonable valuations. These two names are Advanced Micro Devices (AMD) and Netflix (NFLX), and both look like great buy-the-dip candidates.

(Source: TC2000.com)

While several high-octane growth names have seen a relentless bid under them since the election, NFLX and AMD have taken a back-seat, with AMD underperforming since its Xilinx (XLNX) acquisition and NFLX seeing muted returns based on fears that a return to normal activity after COVID-19 would weigh on subscriber growth. In the former case, the deal is finally near closing which should help the stock regain its momentum. In the latter case, NFLX just came off a much weaker quarter than anticipated, with net streaming additions coming in at just ~4MM, down from guidance of ~6MM. While this is obviously a disappointment,  it does not affect the long-term picture for the stock, which remains quite bullish. This long-term outlook includes significantly higher free cash flow, continued margin expansion with higher prices, and the fact that competition or not, there is a very big pie for all streaming companies as the shift from cable to streaming options continues. Let’s take a closer look at NFLX below:

In NFLX’s recent earnings, revenue was up 24% year-over-year to ~$7.2BB, which beat guidance of ~$7.1BB. This was unfortunately overshadowed by the miss on subscriber growth, but it’s worth noting that average revenue per user was up significantly, partially offsetting the miss on paid subscribers. Besides, despite the short-term focus on two weak quarters (Q1 and Q2 estimates of 1MM), global paid memberships are up more than 13% year-over-year to 207MM, and this should drive significant margin expansion both from an operating leverage standpoint and due to higher prices. We saw evidence of this in the results, with operating margins climbing to 27.4%, up more than 1000 basis points year-over-year. This is the real story for NFLX: an improving free cash flow and margin story. So, a softer year ahead shouldn’t spook investors, especially with a lighter content line-up than usual due to COVID-19 headwinds.

(Source: YCharts.com, Author’s Chart)

Given the significant improvement in margins, NFLX is set to increase annual EPS by more than 65% year-over-year ($10.12 vs. $6.08), and this is despite lapping 48% growth last year. These growth metrics are not what we typically see from a mega-cap company and justify an earnings multiple of at least 60,  which would translate to a fair value of $607.20 in FY2021 and $806.40 in FY2022. This translates to material upside from the recent dip to $500.00, and this assumes that NFLX doesn’t beat these estimates. I would argue that these estimates are conservative and that $10.60 and $15.00 are possible in FY2021 and FY2022, respectively, translating to a fair value of $636.00 and $900.00, or 80% upside vs. FY2022 target. So, while it’s easy to get caught up in the noise and competition fears, I believe a lot of this negativity is already priced in at $500.00 per share. Therefore, I see this dip below $505.00 as a low-risk area to start a position in the stock.

(Source: TC2000.com)

If we look at NFLX’s technical picture, this corroborates the view to buy the dip, with the stock still seeing minimal technical damage and resting on a multi-year trend line near $490.00. Obviously, this trendline may break, and the monthly moving average might get tested near $460.00. However, I would expect any break of this trendline to be a shake-out, so I have added to my position in the stock, increasing my average cost to $450.00.

The other name worth keeping a close eye on during its recent correction is Advanced Micro Devices, one of the highest-growth companies in the tech space. As shown below, AMD has a relatively unimpressive earnings trend between FY2014 and FY2017, with two years of net losses per share and minimal growth. However, the company has seen a significant acceleration in annual EPS growth the past two years, with FY2019 annual EPS up 39% and FY2020 annual EPS up more than 100%. This strong earnings growth should continue due to margin expansion thanks to the launch of the new Ryzen processor series, with gross margins set to make a run at the 50% mark potentially.

(Source: YCharts.com, Author’s Chart)

As shown above, FY2021 annual EPS is currently forecasted at $1.96, with FY2022 annual EPS of $2.54. These are incredible figures for a company trading at below $100.00 per share and growing annual EPS by more than 25% year-over-year, suggesting that there’s considerable upside to this story. Even if using a conservative earnings multiple of 55, which is at the lower end of AMD’s multi-year range, this would translate to a fair value of $107.80 in FY2021 and $139.70 for FY2022.  This translates to more than 70% upside from current levels for the 18-month target price and more than 60% upside even if the company misses these estimates and comes in closer to $2.40 in FY2022.

(Source: YCharts.com, Author’s Drawing)

If we look at AMD’s technical picture, it’s quite similar to NFLX, with  AMD consolidating for over nine months and allowing its long-term moving average (teal line) to play catch-up. As shown from the multi-year chart, any dips to this moving average have been solid buying opportunities, and this moving average is now sitting near the $71.00  level. So, if AMD were to dip below $77.00 and come within 10% of this moving average, this would provide a great buying opportunity and bake in an even further margin of safety. So, if we see further weakness in Q2, I plan to start a small position in the stock.

(Source: TC2000.com)

The tech sector continues to remain quite overvalued, with several names trading at more than 50x sales, but both AMD and NFLX look like solid bets that have drifted down to more reasonable valuations. So, if we see any pullbacks below $505.00 on NFLX and $77.00 on AMD, I would view this as a low-risk area to either add or start positions in each stock.

Disclosure: I am long NFLX

Disclaimer: Taylor Dart is not a Registered Investment Advisor or Financial Planner. This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Taylor Dart expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.

NFLX shares fell $0.28 (-0.06%) in after-hours trading Thursday. Year-to-date, NFLX has declined -5.91%, versus a 10.63% rise in the benchmark S&P 500 index during the same period.

About the Author: Taylor Dart

Taylor has over a decade of investing experience, with a special focus on the precious metals sector. In addition to working with ETFDailyNews, he is a prominent writer on Seeking Alpha. Learn more about Taylor’s background, along with links to his most recent articles. More...

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